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FILED DECEMBER 14, 2012

Dear Client:

At the New American Foundation forum on Wednesday which took aim at big brewers as well as the ABI - Modelo deal, there were also industry outsider speakers a'plenty - actually a majority of the day's lineup. Some of them were less than fully informed, but they commanded a very public form regardless.

You may recall the Special Counsel to American Antitrust Institute Sandeep Vaheesan, whose recent white paper on the ABI - Modelo deal strongly advises against what they see as an anticompetitive merger. Among his many illustrative contentions: Big guys will increase market share, already at 80%, to 85% using conservative estimates (not taking the planned independence of Crown into consideration) and "in many local markets, share numbers are likely to be even higher -- in LA, Miami and other markets with large Latino populations, shares of Modelo and ABI are probably much higher than they are at the national level," because "multiple surveys have shown that Bud Light and Corona are the two most popular beers among Latino beer drinkers". [We note A-B has comparatively low share in both LA and Miami]. You've likely heard the rest: the deal could lead to significant loss of price and non-price competition. Like, post deal, wouldn't ABI be disincentivized to develop Bud Light Lime, currently a direct competitor to Corona. [Ed. Note: The New America Foundation also issued a white paper yesterday to back up their claims, seen here: http://www.newamerica.net/publications/policy/a_king_of_beers ]

MORE OUTSIDERS DOG THE DEAL. The second panel explored consolidation's effect on social welfare. It opened with Dr. Thomas Babor, author of Alcohol and Public Policy: No Ordinary Commodity; he stressed that the "vast literature" from the past 40 years reveals that "the benefits connected with production, sale and distribution of alcohol come at a tremendous cost to society." It's among the top 5 causes of disability and death in just about every region except the Middle East and sub-Saharan Africa, he added.

Former Detroit Chief of Police and Director of the Department of Liquor License and Control in Arizona Jerry Oliver was more topical: "It was my experience that generally, the industry gave lip service in support of strong regulation. They'd talk about the need for strong regulation and the need for the three-tier system, which depended on strong regulation. But they were absent many times at the Legislature where the real tough decisions were made about budgets. And since the state alcohol regulator doesn't have a checkbook and lobbyists generally do, sometimes we were left on the short end of the decision making process."

That second panel even brought Rev. Cynthia Abrams of United Methodist General Board of Church and Society to the table, who stressed that faith-based organizations should have a bigger role in alcohol policymaking. "In communities where faith, law enforcement and public health have worked together, you find effective policy and lower addiction rates," she said. The faith community is already a "force to be reckoned with" in the tobacco industry, and she "hopes to work as effectively" in the alcohol industry, too.

Of co-panelist Tiff Heffernan's article on "Booze-Soaked Britain," a warning against the tied-house system, she applauded the depiction as a "clear vision of what it could look like if we Swiss cheese the three-tier system."

SAM C. DEFENDS DISTRIBUTORS. In response to a question about whether it would be better if there wasn't a three-tier system for craft brewers, Dogfish Head's Sam Calagione stressed that the three-tiers system works for craft, and that the alternative is grim. "Look at that Costco scenario. Frankly if that model took effect, I really think it would be game over for craft." Amen, brother. Sam also said that he believes "state laws should support independent distribution, and that [they are] not smothered by undue influence or ownership or control by the largest brewers, so we can ensure access to market for all brewers."

So while the forum's tone was very anti-alcohol (the day's final question: "Can you guys say one positive thing about the industry?"), the participants did seem to see the value of the three-tier system.

BIG BREWERS TALK BACK

In response to the forum referenced above, the Beer Institute's Joe McClain issued a statement stressing that the US brewers and importers "have a strong record of supporting the three-tier system of beer production, distributing and selling, and have opposed any effort to dismantle or weaken this system precisely because it has worked so well."

Joe says that a "healthy three-tier system requires balance between the tiers, meaning that brewers and importers maintain some oversight, within federal and state regulatory codes, over how their beer is marketed by distributors."

Regarding the panel in DC, it has "sounded a false alarm over alleged public health dangers stemming from consolidation among some brewers" and that BI members "are among the most effective partners to law enforcement, community leaders and families in reducing drunk driving and underage drinking..... While there is still work to be done, brewers and importers have a record of responsibility that is unmatched."

CRAFT LEADERS TAKE ANOTHER SHOT AT BIG BREWERS IN ST. LOUIS P-D ARTICLE

The craft brewers are on a role. The Brewers Association's Charlie Papazian, Bob Pease, and Schlafly's Dan Kopman penned a guest opinion piece in the St. Louis Post-Dispatch, which takes on big brewers for creating what they call "faux-craft beers." This is the latest in a media blitz pitting craft brewers against big brewers, and suggests a more acute rift between the two than we've seen in the recent past.

The trio writes that "even as craft grows" the "dominate... A-B InBev, headquartered in Belgium, and SABMiller, headquartered in London, now control 75 percent of the U.S. beer market between them. Heineken and Modelo (Corona) and other imports are 14 percent, and A-B InBev has a deal in place which, if approved by the Department of Justice, would allow them to buy the half of Modelo it doesn't currently own."

They also criticize the Blue Moons and Shock Tops of the world, noting "they don't label these faux-craft beers as products of A-B InBev and MillerCoors." The piece also notes the Bigs purchase of craft brewers -- Goose, Leine's, Weinhard, CBA -- "they sell these beers through their strong distribution channels, but market these faux-craft beers as if they were from independent, locally owned craft breweries."

And then a call to action: "If you think craft breweries are a good force in America, take the time to familiarize yourself with who is brewing the beer you are drinking.....It makes a difference. By supporting small and independent craft brewers across the country, we are giving them a chance to thrive in business, create more jobs, boost the economy and compete against the massive corporations that have controlled the market for so long."

THAT'S NOT ALL. The Brewers Association also issued a press release, which is being styled as "craft vs crafty" and getting a lot of Twitter play, which says the "multinational brewers appear to be deliberately attempting to blur the lines between their crafty, craft-like beers and true craft beers from today's small and independent brewers," says the statement. "We call for transparency in brand ownership and for information to be clearly presented in a way that allows beer drinkers to make an informed choice about who brewed the beer they are drinking." BA exec Paul Gatza told CBD they are "fed up" with big brewer "faux" craft, but "we don't have a long term strategy in place that involves petitioning the FTC about misleading the customer." It's just a marketing and PR move.

BIG BEER RESPONDS AGAIN. For its part, the Beer Institute issued a response to this from Joe McClain. "Critics of today's brewers miss the point that small brewers in this country are already enjoying a generous tax advantage over larger brewers and all importers, a policy designed to open pathways to the marketplace. In fact, the small brewers in this country are experiencing explosive growth - their dollar sales were up 14 percent in the first half of 2012 - and they represent the fastest growing segment within the industry, having added 442 new breweries in 2012 alone. This indicates that the craft brewing sector is doing just fine producing high-end beer for high-income consumers, despite a sluggish economic recovery impacting hard-working, middle class Americans..."

OUR TAKE. This is an awful lot of vitriol [edit: vitriol is perhaps too harsh a word here, in retrospect. How about 'sharp verbosity'] for an industry that is -- as one nationally recognized consumer goods reporter put it to me tonight -- usually so "uncharacteristically friendly" compared to other CPG industries. I understand that small brewers resent big brewers trading off their small-town equity. It must be infuriating. I also understand that big brewers are just marketing brands just like any company would, and the quality of their beer is beyond reproach.

One beer industry veteran put it best to me yesterday morning: "The industry seems to continue to behave as though we are the only ones watching. The many recent clashes between tiers and within tiers (most based on assumptions of individual or tier rights) plays right into the hands of industry detractors." Perhaps we should check ourselves before we wreck ourselves. I believe that's a rap song. If not, it should be.

YET ANOTHER THINK TANK TAKES ON BEER BUSINESS

Yes, it gets worse. This time, the libertarian Competitive Enterprise Institute jumped on the bandwagon by taking the stance that the regulated three-tier system is the culprit in creating a "beer monopoly," even though they concede that "most Americans have access to a wider variety of beers from a greater number of brewers than at any other time in our nation's history." Rather than draw the obvious conclusion that the reason for the choice is due to the independent distribution tier (ask a craft soft drink company how hard it is to get into the Coke bottling system), the CEI's Michelle Minton takes the opposite view that distributors "make it more difficult and expensive for small and startup brewers. If we want to prevent the possibility of a beer monopoly, encourage new brewers in the market, and increase the variety of beer available to consumers, then we need to free the market more--not less." Michelle has long been a foe of three-tier in her writings.

CORRECTION: Yesterday we implied that the BA had "just hired" a white shoe PR firm, but in fact they have been working with the Rosen Group out of New York for over three years.

MANY THANKS TO Heineken USA for letting me crash their holiday party in their swanky new digs in White Plains last night. Truly a nice time.

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